Panicked Fed Slashes Rates to Near 0%, Throws $700 Billion QE on Top, after $1.5 Trillion Shock-and-Awe Repos Fizzled. Stock Futures Plunge 5%, Hit Limit Down

by Wolf Richter • Mar 15, 2020

Holy moly, what a mess. But here is our hilarious cartoon of Jerome Powell tearing out his hair. Gotta keep you sense of humor.

Sunday at 5 p.m., the frazzled Fed announced in a statement that it slashed its policy interest rate by a full percentage point, to a target range between 0% and 0.25% for the federal funds rate and that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

It also slashed by a full percentage point to 0.25% the interest rate at its discount window, where banks can borrow from the Fed directly.

It also slashed the Interest on Excess Reserves that it pays the banks for parking their cash at the Fed to 0.10% effective Monday. In 2019, the Fed paid the banks $34 billion in interest on reserves – which is pure income for the banks. This income for the banks is now near zero going forward.

In the press conference following the announcement, Fed Chair Jerome Powel said for the umpteenth time that the Fed doesn’t see negative interest rates as appropriate – and that’s a good thing for the banks, because bank stocks have collapsed to multi-decade lows in negative-interest-rate Europe.

And while he was at it, Powell said that the FOMC meeting that was supposed to take place this Tuesday and Wednesday had been cancelled.

The also Fed announced $700 billion in QE-4 or QE-5 or whatever, promising to increase “over coming months” its holdings of Treasury securities by “at least” $500 billion and its holdings of mortgage-backed securities (MBS) by “at least” $200 billion. In the Implementation Notes, it specified that the Desk “conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS.”

And this Treasury market the Fed is referring to has gone haywire. The 10-year Treasury prices fell all last week, with yields tripling in five days, from a historic low of 0.32% Monday morning to 0.98% late Friday, having briefly hit 1.02%. For the Fed that’s scary.

Upon the panicked Sunday afternoon announcement by the Fed, S&P 500 futures plunged 5% to hit limit down, and for now remain stuck at the limit down, which might make for, let’s say, an interesting Monday morning:

https://wolfstreet.com/2020/03/15/panicked-fed-slashes-rates-to-near-0-throws-700-billion-qe-on-top-after-1-5-trillion-shock-and-awe-repos-fizzled-stock-futures-plunge-5-hit-limit-down/